Price Convergence in Agricultural Commodity Market SURABHI MITTAL

What we know? Commodity exchanges were initiated by The Government of India in 2003-04 This can be an effective mechanism for price discovery and risk management. MCX and NCDEX Soya oil, guar seed, guar gum, gram, jute, rubber, pepper, turmeric, wheat, kapas etc

What we don’t know? Institution of the commodity spot markets in not well developed Price discovery is poor in terms of efficiency Degree of price volatility Relationship between the spot and future prices

What we intend to find? Convergence of spot and futures prices Present state of relation between spot and future prices Decompose the factors that impacts the convergence Agricultural commodity markets. Policy implications and recommendations based on the derived results.

Spot vs Future Price Spot prices: Prices agreed in present and cash paid instantly to get the commodity. Future prices: Price agreed in present time and exchange of commodity for payment is done later at the end of the contract. As futures contract nears expiration Futures price = Spot price Futures price > Spot price, we can buy in spot and sell in futures Futures price < Spot price Difference in the convergence is explained Arbitrage Law of supply and demand Storage, seasonality, transportation costs etc The gap contain information about the expected future price

How do we find? Notion of the law of one price, notion of market integration. To analyze price convergence in the present context apply several methodologies Correlation analysis Stationary and co-integration analysis Price indexes. Impacts of various factors that lead to non convergence would be decomposed using the methodology of decomposition models.

Data Data - Major agricultural commodity traded Sensitivity analysis The time period would be post 2003 Averaged monthly/weekly data points

Thank You! surabhi@icrier.res.in